11 Ways to Spice Up Your Emergency Fund

This article is by Adam Baker, a GRS Staff Writer. In addition to writing for Get Rich Slowly, Baker blogs over at Man Vs. Debt, where he discusses ways to simplify your financial life.

A thriving emergency fund is an essential piece of a healthy financial picture.

You’ve heard this a million times before. The basics of emergency funds have been covered in depth. We’re used to hearing discussions on why they’re important and how large they should be.

But do you know what we don’t hear much about? How freakin’ boring they are!

Let’s be honest: There’s nothing sexy about building an emergency fund. Sure, it’s possible to get fired up for the initial push. You can take advantage of small, specific tips to create an early spark. But what about going from $1000 in savings to six months of expenses? Eventually the excitement fades.

Testing a fresh approach can change everything. Sometimes all it takes is a minor shift in mindset. Whether you’re just getting started or need a push towards the next major benchmark, here are eleven tips to help spice up your saving:

Treat your emergency fund as self-insurance. An emergency fund is just another way to spread risk. You’re spreading the risk that something unexpected pops up and wrecks your budget or causes you to fall into a cycle of borrowing. All too often, though, we’re worried about chasing 0.5% interest-rate increases or the lure of tying up our money in a bigger, better deal. Stop fretting. Find a high quality high yield savings account with a decent return and plant your money there. It’s not part of your investment portfolio — it’s part of a diverse insurance plan.

Narrow your definition of an “emergency.” Having savings in the bank can cause us to justify some unusual behavior. Suddenly, every unplanned expense becomes an emergency. How can anyone be expected to build a robust emergency fund when they’re tapping into it every other month? Fight back by clearly defining what you will consider an emergency upfront. You’ll be shocked how fast your fund will prosper when you don’t constantly use it as a crutch.

Over-budget for miscellaneous expenses. So how do you deal with those unplanned expenses that aren’t valid emergencies? Expect the unexpected. Aim high on your miscellaneous budgeting category. You’ll break your budget less often and avoid the habit of reaching for your emergency fund. When these expenses do come up, take note, and add them into your budget. Eventually you’ll develop the ability to project nearly all non-emergency expenses ahead of time.

Live a pay raise behind. The next time you get a promotion, don’t fall victim to lifestyle inflation. Take the increase in monthly income and set up an automatic transfer to your emergency fund. When applied to retirement, this technique is often referred to as “pay yourself first.” As long as you can continue to live within your means, it works like magic. Looking for a place to start? Scale back one pay raise. Budget using your old income and start transferring the extra today!

Round up your budgeting categories. The simpler you make the budgeting process, the more likely you are to stick to it. One way Courtney and I have been able to simplify is by rounding our categories and expenses to convenient whole numbers. If your debt payment is $82.31 per month, budget $85. If your mortgage is $1368 per month, budget $1400. Not only will budgeting seem easier, but at the end of the month you’ll have a buffer in your account which you can sweep into your emergency fund.

“Snowflake” your unplanned income. The term snowflaking is a nickname given to the process of applying any amount of extra money (no matter how small) to your debt with the lowest balance. It’s a neat concept that can help quickly build momentum. There’s no reason this should be limited to paying off debt. Anytime you bump into a small windfall, immediately apply it to your emergency fund. Attack it with passion!

“Re-fund” your savings. You know what the perfect amount is for your first emergency fund is? Whatever the amount of your tax refund check! In a perfect world, we wouldn’t be loaning the government our money for the better part of a year – we’d be earning interest with savings accounts and certificates of deposits. But the truth is millions do. If you’re one of them this year, take the money and jump-start your emergency fund.

Save up for the knock-out punch. This technique starts with selecting a base level for your fund. Next, rather than paying extra on your debt or towards a savings goal, pour every extra penny into your emergency fund. Once the fund grows large enough to accomplish the goal and still leave you with the base amount…go for the knock-out. Pay off the debt, book your plane tickets, select a new goal and start the process over. If a true emergency does strike you, chances are you’ll have a little extra buffer.

Focus! Having serious trouble? Make your emergency fund your absolute number-one priority. Channel all of your energy. Pay the minimums on debt. Put your other savings goals on hiatus. (Some respected advisers even suggest halting your retirement savings for a short time!) Only you know for sure what level of intensity is right for you; however there’s a lot to be said for the power of concentrated focus. Put your head down, knock it out, and move on to your other more sexy goals.

Negotiate a “big win.” A broad tip, right? Here’s the point: Use your emergency fund as an excuse to tackle a high-impact project. Need $1000 to get started? Go for it all at once. Ask for a raise, sell one of your cars, or refinance your mortgage. Look at your largest monthly expenses and ask yourself if there is a way you can make a huge impact quickly. Use these opportunities to get comfortable with the basics of negotiation. It’s a skill that’ll pay dividends the rest of your life.

Sell your crap. Kill two birds with one stone. Have an emergency-fund dedicated spring-cleaning session. My suggestion is to create a list of everything you own. Every single item. Go room by room. Nothing has made me want to purge my stuff more than this process. Afterward, set a deadline to sell half of the items on the list. Get passionate and declare war on your stuff. Not only will you feel refreshed, but your emergency fund will be more healthy than ever.

What other ways have you found to spice up your emergency fund? How did you get started? Did you switch it up to maintain motivation? Share your personal experiences below!

Photo by Adam Baker — but not the same Adam Baker who wrote the article! It’s all very confusing.

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Instead of going all or nothing with eFund or debt or whatever, I broke stocking my eFund into different stages. Each stage is a different goal which I then add to my priority list like I would any other goal. Not having $1k in savings is a huge risk, so it has a higher priority. Likewise, that last $1k provides much less risk protection, which explains why the end is harder. I think it makes the most sense to put your money towards whatever mitigates the most risk at the time. For instance, perhaps someone would save a $1k eFund, pay off their credit cards, stock their eFund to 3 months, pay off their car loans, stock their eFund to 6 months, etc. It makes more sense to look at all of the ways you can reduce risk and choose the most effective rather than just picking one and sticking with it.

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Chiot’s Run

Narrow your definition of an “emergency.” is the best one. You should have other savings account to cover other unexpected expenses. I have: car, home, medical, general, vacation & other savings accounts that are solely to save up for both expected and unexpected expenses in those categories. My emergency fund is just for that Emegencies, not things I didn’t have the foresight to expect, like a care breaking down. I know that will happen eventually so I save for those as well.

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Matt@Self Improvement Resources

This is a good post… especially #2 and #4.

And of course to take your #4 point to the next level, if people (especially coming out of college) would maintain their current lifestyle after they land that BIG JOB, they could put enough money away after a few years to be filthy rich at retirement age. But that is a different story.

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PL

I save all my change and deposit it into savings (presently my EF) whenever I go to the bank. My bank has its own coin counting machine so I just keep a pouch in the car that all my change goes into and take that in with me. I dump it into the machine, get my little receipt and have the nice teller put it into my account, all in one quick visit.
I also make a habit of not paying exact amounts. If the item is $1.07 then I get $.93 back which goes straight into my pouch. You’d be amazed at how fast it adds up!

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Mike

It is hard to make good financial decisions with out some piece of mind that comes from an emergency fund.

Emergency funds aren’t sexy … but they help me sleep at night.

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Paul

This is great advice. A strong emergency fund gives not only gives you a sense of security but peace of mind as well. Personally, I believe in paying off all debt before starting an emergency fund. I don’t see the point of saving money at a low interest rate while paying debt at a high rate.

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Maharani

I also have found it helps to set interim goals. My first was 1 month’s mortgage payments. Now its 2-I currently have 1.5 months. My goal is 9-12-tough call-but you do it a month at a time. I graph my progress and check regularly.

I am also saving towards having income to pay bills and currently have some $$ outside my retirement accounts generating an 8% dividend. I just received the last check of a bonus-it is all going in-it will double the balance, double the dividend, and generate enough income to pay my power or car insurance bill. As I am not retired, I am reinvesting the dividends and will continue to build the balance. My goal is to cover all my monthly bills with this account but Im building it 1 small piece at a time.

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Amy H.

Great post.
(I also like Bill’s suggestion at Post #69.) 🙂

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Bill Winterberg

May I suggest changing the colloquialism in tip #11 from “kill two birds with one stone” to “feed two birds with one seed.”

From your “friends” at the National Audubon Society.

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Jennifer

I know someone that instead of thinking about having a 3-6 month EF and the overwhelming task of building the account up to $10,000 or so, would think in terms of specific bills instead. First she saved enough to cover 3 mortgage payments. Then she saved enough to cover 3 electric bills, then 3 car payments, then 3 phone bills, and so on. It broke down the large EF into smaller, mentally more attainable goals to work towards. I thought it was a great idea.

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April

@ Nicky 55 and @ 58 Ken
To each their own. I’m curious if you all have actually tried the method I am suggesting or not. This is a possible method for people who like to see a big check go into their EF at once, and whom may normally have a hard time saving the $5 here and the $25 there. Also if a real emergency did occur you always have the option of changing how much you claim, letting you rebuild your fund for a brief amount of time with money that you are not used to having and have not included in your normal budget. This method could be considered for someone who only has $500 to $1000 in the EF fund and is trying to work up to a 3 months supply. There should still be monthly contributions to the fund but for someone just getting started on their EF it can be a real moral boost. There is the potential emergency during the first year but then like Alexandra said that is what credit cards are for (I personally prefer to just have a large EF but to each their own).

To put it in a different light, people tend to think more about how they spend large chunks of money. That’s why people carry $100 bills and try not to spend them, or why the government decided not to send out stimulus checks this year but rather suspend $10 worth of taxes per paycheck for a few months. This boils down to mind games, but the truth is that most people are more likely to apply that $2000 tax rebate check all at once to debt or savings than they are going to try to apply the extra few dollars each month to debt.

I know the argument against this method of saving. However not everyone saves the same way, some of us require a bit more spice and a planned windfall complements of the government once a year can provide more mental relief/excitement than getting an extra hundred dollars every month.

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Robert

I need to get to work on an emergency fund. Hopefully I’ll never need it, but I’m sure someday I will.

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emma

My EF is geared towards my spending psychology. Not lack of trust of myself, just encouraging my motivation. You know some folks lose weight by looking at a pic of a skinny supermodel for inspiration, others might lose weight by looking at an overweight relative they don’t want to turn into. Whatever motivates you.

For me, the $2K in savings is HARD to spend (which is good!). It’s cash, in my account, the green line on my spreadsheet. Credit is nothing much to me – an invisible nothing that turns into a red line on my spreadsheet when I use it. I feel satisfied when I look at the green savings line, so that’s my motivation for keeping it there. I never got in trouble using credit cards anyway, so I trust myself completely. I simply don’t like to use them.

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David@DINKS Finance

One way we could all make our emergency fund more “exciting” would be to take a good hard look at our hobbies: Is there any way you can make cash on the side with one of your hobbies?

I know someone who started with one Minnesota Viking’s football collectible, and has traded up and now has a collection worth something like 50k. Talk about an emergency fund! And he never brought in more money. Instead he bought things and sold them for more. Plus he had a heck of a lot of fun doing it!

Can your hobby make you extra money for your emergency fund, on the side??

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rabbit

One trick I use, is that I often have to use cash to pay for soemething during work travel…and that money is reimbursed a month or two later by my office. I always take that reimbursement and put it in my savings, as it feels like it has already been spent.

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Linear Girl

Nicky at #54 seems to think that my arguments in favor of an emergency fund are based in a lack of trust in my discipline and excuses about the instability of credit cards (I’m taking his general comments and making them personal because I’m definitely one of the people at whom he was aiming). Well, he’s wrong. Agree with my arguments or don’t, but don’t try to undermine them by speculating about my motives when you don’t even know me.

For what it’s worth, I’ve never had a problem with debt and I trust myself to handle credit. The first and only time in my life that I couldn’t pay off my entire credit card balance and had a hard time paying my student loan, I got a second job and within two months had started a new career so that I wouldn’t be in that situation again. I currently have sufficient available credit to buy a condo so I know I can trust myself with the cards.

My thoughts on the subject of emergency funds come from working in finance for the last 20-odd years, from reading about what has worked for others and seeing what has worked for family members, from reading stories this past year about people whose credit cards were being cancelled, and from the value I place on self-reliance.

So those are my credentials. If my arguments are persuasive then I’m glad my experience is useful to you, and if not just keep living your life the way you see fit and I wish you the best.

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quinsy

to those who are arguing that an EF doesn’t make sense, remember that we all have our own specific situations to deal with and have to make our goals and plan accordingly. Being able to remove emotions from the equation is impossible with money, what are we, robots? We can’t just put money X in account Y and not think about the sacrifices, the successes, the losses, whatever that money and the way we’re using it means to us.

Many of us have so much debt that it won’t be paid off for years and years. Should I just have a credit card because ‘the chances I’ll have an emergency are low’? No way. That’s like not having health insurance because ‘hey, I’m young, cancer and car accidents happen to other people. Logically, it’s unlikely to happen to me.’

I’ve got $175,000 in student loan debt and a $15,000 emergency fund that would cover 6 months of expenses for my husband and I. So would I feel better if I had just put my half of the EF into my loans and right now had more like $168,000? That is just a number, even though logically it might turn out well for me in the long run to have done it that way, it wouldn’t make me feel good right now, in the midst of an emergency.

I was the victim of a theft last week in which all of my valuable electronics were stolen including my laptop which I use for work. Because of my EF, I was able to go right out and buy a new laptop, and not cry myself to sleep because I was broke because of some stupid drug addict who broke into my car. As I am on vacation, I am able to go right back out and buy a nice digital camera again to take photos of this amazing place. This experience would have turned my stomach if I had to put everything on credit. My choices would be either live without all my stuff until I could save up enough to buy it (would take months) – I could do that, but it would suck – or put stuff on a credit card and feel horribly guilty rather than feeling proud that I was prepared for an emergency. Even if I could argue to myself that “the extra payments on my loan have saved me money that might equal out to the extra payments I’m making on a credit card”, that rings rather hollow when my debt looks endless anyway and the emergency is making my life miserable at this moment. If my loss had been something even more crucial – like my house burning down or car being stolen or getting run over while crossing the street – I’d be even more psyched not to have to use credit while waiting for some convoluted insurance claims process that probably won’t pay me half of what I lost was worth.

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Financial Samurai

Good tips! Health disasters are one of the biggest causes for bankruptcy. Make sure your health insurance is in full effect!

For the EF, it’s all about “Going Broke To Win Big!”

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joruvah

Wow, lots of opposition to an emergency fund! $1000 as a starter emergency fund is next to nothing. If you don’t have this cushion in your checking account at a minimum you’re really taking a gamble. You’re one paycheck or payment cycle away from an over draft.

I live in a country where cash in king and some things you can’t use a credit card for everything (like my recent $300 car inspection/repair).

If you managed to get into $10,000+ consumer debt, “the math doesn’t work” argument doesn’t hold much weight. Emotions play a role too or you wouldn’t have accumulated debt.

You’re saving $100-$300 a year by living on the absolute edge. But if you want to try something else, all the power to you.

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Ken

@April – the other problem with your suggestion is that it’s not a true emergency Fund. What happens if you start withholding more money in May and you have a $2000 medical bill in October. You have to wait until Jan/Feb at the minimum to get your money back from the government. If you had been putting that extra money in a savings account instead you’d be able to put it right towards your emergency.

Edit: totally didn’t see Nicky’s response @ 55. Whoops.

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Patty

Congrats to all of you – what a lively set of comments – GRS – kudos.

One point – While I call this sum of money an EF – I think it is a misnomer. Over time (several years a long time ago) I managed to go from no EF to a six month EF. The goal is to have enough on hand if their was a financial drought for six months, then I could live in the style that I am acustomed to. Now if the drought was ‘real’ I’d live much for frugally. Emergency – doesn’t exit – having a budget (since I was in college) has made me an expert. Here’s one way to boost your EF – the deductible for my auto policy is $500 annually – I save $42 / month. If I don’t use the deductible – then I designate it to the EF or to the Major Repairs Auto line in the budget.

Taking the pennies, nickles … up to the dollars, is a great way to inch the EF up there. I applaud all your readers…. keep on striving. If the last push seems tough, adjust your goal upward and onward.

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Katherine

Thank you for this post. My emergency fund is almost at the level where I’ll feel comfortable but that last stretch is torture! Feels like it’s taking forever. I just need to calm down and stay patient. Your suggestions are perfect… sweep my extra cash at the end of the month … maybe sell a couple of things … and deposit money from any side jobs. Eventually it will happen … and when it does, I can look forward to saving for other (less boring) opportunities!

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Nicky

Kat @40 – Actually, someone who is paying off their debt at the minimum payment or above is not likely to default and therefore someone the banks want to keep. I suppose it might depend on how bad your credit rating was, but generally not. The problem is removed by keeping a card which is used every month but paid off in full, although the banks refer to us customers who do that as ‘freeloaders’.

April @47 – well then I hope you don’t have an emergency in October or December or February before you get your $2000 back. Especially if you’re using it as a way to jumpstart an EF, and therefore don’t have much of one set up yet!

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Nicky

@Alexandra #1 – I agree with you, and I think the reason some people do not, is because they do not trust themselves with the credit. The excuses about companies cancelling unused accounts is just that – an excuse. IF you are disciplined, you can still keep one open by putting minimal charges on it, eg monthly bills etc.

When I was paying off my $50k of debt (in order of interest rate, because it made more sense) I was closing the accounts as I finished them. But I kept one open, made it joint with my partner and we used it for the monthly expenses such as groceries. The limit was far higher than we needed, so if an emergency came along I put it on there. So what if it meant increasing my debt? In the meantime all my money was paying off 14%+ interest rates — and it turned out we never even had an emergency.

But the key is, I am an excellent budgetter (once my period of debt-gaining madness ended), and very disciplined with spending. If other people aren’t, then they can’t trust themselves. A hot date would be an emergency and the clothes would end up on the credit card!

Kidding aside, emergencies are obviously not the kind of excitement you want in your life. I try to remind myself that many emergencies can be mitigated (at least from a monetary standpoint) by having the e-fund, and that keeps me going.

Hurray for boring!

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Bill G.

Adam–great post. I have had money issues or lack of all my life…I have been reading different financial websites that all recommend the EF, and I think it is really good advice. Just knowing as you make your EF larger that you can now make choices and not be forced into bad money decisions is well worth it!

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Robert

I love the “sell your crap” tip. After college I was strapped and sold a bunch of my junk and got quite a bit for it. Not only that, it de-cluttered quite a bit and helped me realize that junk is expensive, takes up space and, in a few years, means so little to you that it’ll get tossed away. I’ve bought a lot less because of that realization.

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Nancy L.

@Alexandra

Coming from the side of the fence of someone who is in debt and yet chose to build up a baby emergency fund, I can tell you that having the fund was a major key towards being able to shift my thinking about money. In the past, I lived by a budget where credit was *always* the solution to money flow problems. The biggest change I needed to make within myself was continually falling back on that “solution”.

The emergency fund might be a technicality–of course the math works out in favor of just paying down debt if one is able to limit new charges to the same situations that they’d tap an emergency fund. But that argument is like the argument that one shouldn’t have debt in the first place. The problem isn’t something that can be boiled down to calm rational equations. The problem is learning how to avoid self-sabotage and how to develop healthy habits.

The emergency fund teaches you how to keep money set aside without touching it. You won’t learn that skill if you just throw your money at a credit card balance. The fund also teaches you how to decide what are true emergencies–after you’ve spent months scrounging that $1000 and know how much work it will take to replace it, you are far more discriminating about what you will spend it on.

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mewithoutdebt

@Linear Girl I think it is more about “savings stops the cycle” more than having resource you have control over.

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Maddie

@ SystemError…i do have health insurance included in my fellowship package 🙂

So I guess I’ll shoot for something like $200/mo for my first year in grad school, which will bring me to $2400…that way after the first year I won’t have to worry about it and can redirect that 200/mo to other savings or fun stuff.

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April

@Brenda 33.

I said its a good way to jumpstart a EF. Yeah I’m losing out on the $120 in interest over the span of a year (it would be less than that but I’m not going to argue about it), however I’m used to living on a smaller budget and I can almost enjoy doing my taxes knowing that I’m going to get back a decent chunk of change. I understand the argument against doing it this way, but for me personally I like to feel like I’m getting a bonus when March/April comes around, rather than owing the IRS an unexpected amount of money.

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Michelle

I love this post. I never had an emergency fund until I began reading this site and my fiance and I decided it would be a good idea. So, I simply started using the “keep the change” feature of Bank of America, on top of 10% of everything I earn and an automatic $20 a month transfer. It doesn’t sound like much, but after a year I have almost $5K saved up.

I have only had to dip into it once for an emergency flight to visit family because my grandfather was dying. So, I bought an expensive last minute flight to say goodbye and then attend his funeral. Well worth it.

Since we began following this site, my fiance and I have paid off both of our cars, eliminated all our credit card debt, and only have our student loans left to pay. I can’t tell you how good it feels to have money in the bank that I don’t need yet and no credit card balance knocking on my door. We can now focus on us and not stress about money. THANK YOU!!!!

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cph

@Alexandra:

Not everyone is that disciplined. Yes, you are not paying down your debt as efficiently as possible, however the idea behind building the e-fund is to *break the habit* of using debt as a crutch. It’s tough for people who have been relying on debt for years and years to kick the habit. Perhaps you’ve never been addicted to something, or had a bad habit you couldn’t break. Maybe that’s why you don’t understand this approach. Take drinking or smoking: some people who quit can just have one or two without it spiraling into a habit (or worse) again; others can’t, and have to pass up that celebratory drink or cigar.

There is such a variety of personal finance advice that there’s a plan that works for everyone. I’m surprised Baker hasn’t mentioned his Debt Tsunami yet, because I think it’s a great, flexible approach that inherently takes into account your position on the rational/emotional spectrum.

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mitigated_disaster

It *is* boring! I’d so much rather pay off our car loan/mortgage(somehow way more satisfying)or uh, spend it. (the house always needs something) We were able to get excited when the ING was first home savings, but now it’s kind of dull.

We finally have one month of expenses in an emergency fund. I got a bonus and funded the remaining

Actually though, I think my favorite suggestion is in the comments – buying CDs is a fun, smaller reachable goal that will be more spicy than just getting to the next round number. I’m going to try that! Just save up for buying a CD.

But now that I have one month, and my job is quite secure (I just got promoted, and we are actively searching for people), and plenty of available credit on cards, I think we’ll focus on aggressively paying off the car and then come back to slowly increasing to 6 months.

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Linear Girl

@Alexandra – The problem I have with your approach is that I find akin to planning for peace by building up your army and investing in weaponry. You may achieve your goal but since your actions are at odds with your objective you’ve not trained yourself to live in your new, debt-free world.

Of course (of course!) some people can do well with nothing but discipline to sustain them, but most people don’t. Most people with large amounts of debt got that debt through a lack of discipline (not ALL, of course) and one terrific tool for learning to avoid debt is to learn how to save and spend cash. The emergency fund is one way to do this.

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Suz

I save for my EF in an ING account and I created a name for it to keep myself motivated… currently it’s called “9k by my birthday”. This way if I’m tempted to take money out for something that is not an emergency I have to look at what my goal is $9,000 by next June and think about whether I can still reach that goal if I take out the money. It got me more excited about it than just “emergency fund” did!

I’ve also split up some of my emergency fund money into a cd-ladder type deal so that I’m earning a little more money.

I like knowing that I have the extra year of expenses in there so that I wouldn’t have to go live with family or something should I lose my job or whatever. Plus, since I live in an expensive area (San Francisco) it’s nice to know that money that would cover me for a year here in SF would cover me for WAY longer if I moved to a cheaper area.

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Moneymonk

I never thought about having an EF until we bought a house. That’s when I felt it was necessary! Now I have a healthy 5 figures in the bank and no consumer debt. And yes I sleep well at night

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Kat

It is not an “extremely slight chance” that someone who was only paying the minimum would have their credit limit reduced as soon as they pay down their balance. That’s the exact type of person that the bank will WANT to lower the limit on, they don’t care that you are turning your debt around, they care that you had this debt, so now they fear you will default so they are lowering their risk. A couple of years ago, banks were more willing to throw credit to everyone, now they are very risk-adverse about doing that, and are actively lowering the credit limits of “good” customers.

That the bank will deactivate the card is unlikely, but it is VERY common for banks to be LOWERING your limit right now.

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marian

I believe in an emergency fund altho ours never exceeded $2500 until recently. Ours is still only one months worth. But we have two months of food in the pantry, plus household items. We have good insurance & a good credit rating, job security & low credit card debt. No car payment. I agree with the 1st commenter that paying credit card debt off makes a lot of sense before increasing the emerg fund beyond $1K. Improving one’s credit score & having some available credit can help a lot if one is an emergency. Also, once you suspect you may be facing an emergency, say you get sick but are still working, or you hear of layoffs but you haven’t been let go, act quickly & cut your discretionary spending.

Despite two periods where I was out of work for six months, we never needed to put away six months or 12 months of savings. I did tap a vy small portion of my retirement the last time I was out of work and that’s when we decided $2500 wasn’t enough to have for emergencies. I don’t advocate that everyone live as close to the edge as we have, but it is possible. For some people, the idea of having six-twelve months savings is simply overwhelming & they just won’t create a fund – particularly if people are in debt. And we need health insurance reform because if people have medical bills of $50K or $100K or $200K, they’ll be facing bankruptcy even if they had six to twelve months savings.

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Alexandra

I still think that setting up an emergency fund before paying down high-interest credit card debt is not a good idea.

If you become committed to financial freedom and becoming debt free, the psychological benefits of having an emergency fund should not outweigh the numerical and logistical benefits of paying down your debt sooner and more efficiently. Haven’t you already addressed those “demons” by committing yourself to financial freedom? Why continue playing mind games by giving yourself an imaginary “safety net” that lengthens the amount of time it will take you to reach your goal?

The only risk I see to temporarily using your existing credit card as your emergency fund is the extremely slight chance that your credit could be revoked. But I highly doubt that an active card which you have been paying down in a timely manner each month, for months on end will suddenly be de-activated. This is not in the bank’s best interest, and the one thing banks are good at is making money.

There is also a very good chance that you will not have to use that emergency fund during the time you are aggressively paying down your debt, so it really makes no sense to allocate your money in a way that works against your goals to hedge a bet on something that may or may not happen.

I don’t buy the “break the debt cycle” argument. You have already broken the cycle by committing to be responsible with your money. Small set-backs that are beyond your control may or may not happen, and if they do, it is okay to increase your debt load temporarily to deal with it. That’s no excuse not to pay off your loans in an inefficient manner.

You have committed yourself to being responsible with your finances, you have committed yourself to make smart financial choices, and to make your money work for you. Why would you then convince yourself to adopt a plan that makes no sense logically and financially?

I am not advocating that an emergency fund is not necessary – just that it should not take precedence over aggressively and quickly paying down your debt to make your money work for you better. Money is just a tool, and dealing with it in an efficient and logical manner should be lesson #1 for those people who have decided to master their personal finances. The sooner we can remove psychology from the way we deal with our money, the less trouble we’ll be in when it comes to finances.

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SystemError

@Maddie:

The big question for students is if you have health insurance, which I know I didn’t when I was back in school. If you do, I’d probably set up $1000 to start as an EF, perhaps then setting a goal for say $500 each year while you’re in school. The goal oriented approach is discussed here often and is very effective.

If you do not have insurance you may want to re-assess. #1 reason for bankruptcy in this country are still due to health related expenses.

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Jonathan

What other ways have you found to spice up your emergency fund?

I call my emergency fund “The Next Time I Get Layed Off Fund”. I work in IT, and having been layed off twice, there is no better motivation than fear.

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cely

My EF is for job loss only. I have mortgage, so I need to know that I can cover expenses if my job goes away.

I keep my EF in a separate bank (ING) than my regular accounts, so I can’t easily access the money. I have an automatic transfer from checking into the EF each month, and it’s a pain to change it, so I’m not tempted.

ING lets you create sub-accounts, so along with my EF I have a “travel” sub-account. I transfer all earned interest from my EF into this account! It’s not much but it’s slowing filling up, plus I add other money to it as well. But I like this because the bigger my EF is, the more interest it earns, so more money for my travel fund! (I already have a healthy EF; if I didn’t, I would leave the earned interest alone to help the EF grow.)

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yourfinances101

Personally, I waited until I was virtually out of debt before building any kind of substantial emergency fund. Then, it literally lay dormant, gaining me no additional revenue, (because hey, it was for emergencies!)

Once I woke up out of that funk, I invested some of it in a money market that I have complete access to when/if I need it, and I invested some of it in selling electronics online.

I am currently showing about a 10% yield on it.

I can’t imagine how much more I could have made if I decided to start doing something with it earlier

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Brenda

Oh, and one more thing:
April @#26
By doing it your way, and just getting all your extra money in one lump sum in the form of a tax refund at the end of the fiscal year, you’re losing out on all that interest during the year!

Sure, we don’t get much interest now. But wait til interest rates go up again, and online banks are offering 5% or 6%. For every thousand dollars you get $60.00 if the interest rate is 6%. If Uncle Sam is holding on to $2000, that’s $120 lost! Do you really want to sacrifice all that extra money just so you get a rush when you get the tax refund? It’s better to learn discipline and pay your savings first and live on the rest, so you can collect that extra $120 in interest yourself instead of giving it away.

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Brenda

I’ve been rounding up my budget categories exactly as you described in point 5 for years. I love this method, and honestly? It’s great to have that cushion built in. It’s almost like a very small “emergency fund” in itself that helps pay for small unexpected things that life might throw at you (for example, when you accidentally burn your only quart cooking pot, and need to replace it).

For me, my emergency fund is anything but boring! I love trying to save as much as I can into it. Half my income comes from retail in regular very small two-week payments, the other half comes from freelancing in irregular largish chunks (usually once every 3 months). I add to my emergency fund when one of those freelance checks comes in. It’s something I look forward to every three months or so…getting another check that will enable me to put a bit into the EF. My goal for the EF is one-year’s worth of expenses saved, and then I’m shooting for a nused truck fund, so I can pay cash when the need arises. I guess I like having these goals..it gives me something to shoot for, and to see how fast I can get there (on a very limited income!)

Stopping lifestyle inflation is a good one. It’s difficult to not reward yourself the increase and just blow it on crap.

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Chickybeth

I failed to see how the suggestions “spice up” an emergency fund. From the opening paragraph, I thought the post would be more about setting different goals within an emergency fund that we may not have heard about before. This just seems like another list of different ways to force or trick yourself into saving.

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Sam

I label our emergency fund as Dream Home in ING, yes it is our emergency fund but as our savings grows (and if we can avoid emergencies) the money will go to building our dream vacation/retirement home.

Just that little label makes it harder for me to transfer money out of that account, just ask Mr. Sam.

As for debt repayment vs. emergency savings, when we were paying off our non-mortgage debt ($55,500) we went with the Dave Ramsey plan which includes baby emergency fund of a $1000 before attacking debt. The reason, its hard to pay off debt if you keep adding debt, we raided our baby emergency fund twice one for A/C repair and one for car repair, we refunded it and kept going.

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Jennifer Lissette

I am currently about about 3k shy of having my emergency fund built to about six months worth of expenses. My husband and I have paid off all our high interest debt and then are going to tackle my student loans. It’s interesting that people think you should keep a credit card as an emergency fund. We had an American Express that we loved and used quite often. We had a high balance and paid the balance off in one fell swoop. One week after we did so, American Express canceled our account. After nearly ten years of giving them plenty of money in interest.

It just reinforced to me that it’s better to be self-reliant. A credit card company is not going to care if you’re having an emergency – if they are done with you, that’s it.

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April

I believe one of the best ways to create an emergency fund is by having more taxes withheld from your paycheck than there should be. I realize that it’s a tax free loan to the government, but you learn to live on a smaller budget and when you do your taxes you receive a large chunk of money which is a good jumpstart for your emergency fund. Adding $100 here and $50 there to savings is good, but there is a much bigger rush when you get to transfer $2000+ to your emergency fund without feeling like you had to give something up. It may be annoying to give Uncle Sam an interest free loan, but its money saved that you’ll never miss. Also since you will be used to living on a smaller budget you will be better prepared if someone in your family losses their job.

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kenyantykoon

i dont have an emergency fund because all the cash i have is invested in my business ventures. it also doesnt make sense for me to put money away in a bank while i can use it and make much much more. but it is a nice post with things that i should do now but i think that i will hold of on them

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Sunandshine

I save 2$ per day and at the end of each week, I transfer $14 into my ING a/c. The idea was to first start with $1 per day, but I speeded it up to $2. My husband does the same with his salary. He saves $5 per day and at the end of one week, that amount gets transfered to ING a/c ($35/week). He earns more than I do and hence this difference. We have set up automatic weekly transfers for the same purpose. We have done it for a year now and even without our knowledge, I have saved up 672 in a year and my husband has accumulated $1680.
Its unbeleivable how such a small amount can add up. $2300 without major planning.
We all can afford to pay ourselves atleast $1 per day..:)

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Linear Girl

@mewithoutdebt and @Alexandra – It’s not logical to try to get out of debt while still relying on debt to cover any expense, including emergencies. Sure, any money you save is earning less interest than you’re paying on your debt, but having the savings stops the cycle. Also, savings are within your control and credit is not – your lender could change the rate, lower your limit or cancel your card. If the point is to have a resource available in case of emergency it should be one you control.

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Sarah T

Adam, I’m enjoying your writing! What really motivated me as far as an emergency fund was the first time I needed one and already had it in the bank! It felt so good to just be able to write a check (in this case, for my insurance deductible when my car was hit while parked), and knowing how much stress it saved me really drove home the purpose of this cushion.

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Samantha

Great article Adam!

We’re at 3 months of EF savings, with a goal of 4. Beginning to lose some enthusiasm, thats for sure.
Some of your ideas have certainly inspired me to:
1) ask for a raise. its been almost 2 years, and I deserve it!
2) sell some stuff! We had a garage sale, but we have so much left for eBay!
3) begin to over-budget for misc expenses. The car repairs are not emergencies!

Thanks again, I needed this boost today!

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elisabeth

I think that “emergency” is an elastic term, but more is definitely better than less — when you think that you might be unemployed for 6 months or more in this economy, or that a serious accident or house fire or unexpected elder care responsibilities (think how much it would cost if your parents who don’t live near you have a serious illness or need your help in some other way), so it does seem prudent to really build up the emergency fund — if you don’t use it, you can always add it to your retirement funds…
I do have the 12-month CD ladder that #5 escape velocity mentions, and it is interesting — some months I add funds to the CD as it comes due, in other months I’ve had to transfer part of the CD to my checking, but overall, it has been a good way to make some steady profits — though lately the interest rates are so low I’m considering moving some of this money into stocks that pay dividends, since the dividend rates on some stocks are higher than the interest rates on the CDs.

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mewithoutdebt

Adam,

Nice article. However, I have to say that I still do not logically understand concept of emergency fund. Mathematically, it just makes sense to pay off your (high interest debt). Why can’t we just use one credit card as emergency fund and have discipline not to use it all. Even in pile high in debt, I have one card that I never touched. Are we just irrational creatures of habit?

Nice list, I want to slowly change my vacation/emergency fund into separate funds and should sell crap I don’t need to do so, or hopefully can get a raise. I don’t find it boring either, but more reassuring that if my car needs maintenance or there is some extra expense I need to spend I can take it from this fund worry free.

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Linear Girl

I don’t find savings boring, I find it calming. I’ve been a worrier my entire life and creating a balance sheet every month so that I can see the savings balance increase and the mortgage balance decrease keeps me focused and content.

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Maddie

I wonder how much is enough for my EF: I am a 22 yr old unmarried/no kids graduate student on a fixed stipend. I am guaranteed this stipend for the next 5 years–the only caveat, obviously, is if I fail or drop out, which is highly unlikely.

Since my income is fixed ($2,163/mo) and secure, is $1K enough of an EF for me to maintain or should I shoot for 2K or 3K?

I’m also putting away 200/mo each in Long-Term savings, Short-term Savings (for unexpected/fun purchases) and towards my debt (will be paid off in April, then that will be redirected towards retirement).

Any thoughts?

ps. Baker–you have to take the fam to Te Anau on South Island to see the glow-worm caves….bet your daughter would love it! There’s also hiking right there…

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Mike Piper

One of the ways my wife and I slowly but steadily build our emergency fund is that we us Schwab’s 2% cash back visa. The entire Schwab account is in liquid savings.

It’s not a ton, but every little bit counts.

(And no, I’m not saying that spending is a good way to save. Just that we use a credit card for most of our purchases anyway, so we might as well get cash back and build our EF with it. 🙂 )

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Lady J

My grandmother told me that every single tax refund she’s ever received has gone straight into a savings account. She said “If I didn’t need it or use it last year, then why do I need it now?” Similarly, I have decided that each time I get paid, any money left in my checkbook from the previous paycheck will be transferred into savings. This time it was less than $8 but it’s a lot more than that, most of the time. If I didn’t need it/use it last paycheck, why do I need it now? I really hope this will help me build up my EF and stop spending ‘extra’ money frivolously.

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Little House

@Andrea – I have to agree with Baker, it’s really important to have an EF of at least $1,000, then work on paying off your debt. This way if anything comes up, a vet bill, a flat tire, an unexpected utility bill, you don’t have to struggle or go deeper into debt to pay it. Instead, you use your EF and continue paying off your debt as always. Of course, any money you ‘borrow’ from your EF, you’d pay back in.

Thanks for this post, saving is much more spicy now!
-Little House

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Baker

@EscapeVelocity – It sounds like you have a little bit of spice to me ;-).

@Patrick – It’s funny that you bring this up. I almost included it as #12, because Courtney and I just had this discussion. Here in New Zealand they use $1 and $2 coins (the lowest bill is $5). We were just talking about how much you could save if you saved your coins in THIS system, haha.

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Patrick

Two very small (and somewhat silly) ways I’ve been building my emergency fund:

I have a “keep the change”-type bank card, which rounds up my purchases to the nearest dollar and puts the difference into a savings account.

I do a “keep the change”-type cheat with my cash, as well. I put my change into the typical jar, but then take it to a bank for free rolling and put that into my emergency savings account each month. I also remove dollar bills from my wallet and put them into a box (so I only have bills larger than a 5) and bring those to the bank every week to deposit into my savings account.

Since I dedicated myself to only paying cash for my day-to-day expenses, this makes me think about whether or not I want to break, say, a $20 bill. It’s really just mind games, but oddly satisfying to make little gains in savings.

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Tyler

Before I went back to school and I had a job, I always skimmed about $100 off my pay. Granted I was only a teenage worker so my expenses were limited, but it was also only a teenager’s check! Always trying to get to the next thousand marker was my goal and inspiration. Fun trying to see how much I could not spend and instead see the numbers and coincidentally my dividends increase.

Also wanted to comment on #4:
I had never thought of this technique before and I find that it would be incredibly useful! I’ll keep it in mind when I get my next job.

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Gordie Rogers

Wow! This is great stuff. I haven’t had an emergency fund before. Thank you bringing this to my attention.

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Foxie@CarsxGirl

I’m still building a baby EF, but to me, it’s more my floating/freedom fund than anything…. Car repairs plague me almost constantly. (Especially since my car is STILL broke. Has been for seven months now, ugh. Problem source has yet to be identified.) So while not everything is a real “emergency,” it’s there when I need it and I tend to pay myself back quickly.

I could have a much larger EF, but I’ve decided to set aside massive amounts of $$ to pay off my third car. It isn’t much debt, but I’d still rather own my car clear and outright than owe a penny on her. However, I haven’t rushed to pay extra on the loan yet… The extra’s sitting in the bank, as her own EF, in case my nearly 300k mile engine decides life’s too rough to go on anymore and bows out after nineteen years. 🙂

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Jeff

Liked the idea of the EF as “insurance” as you are diverting some of your current resources for future emergencies…

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Aniruddha

Great post Baker. Pretty much I agree with all of the 11 points you mentioned here. I started building my emergency fund in March 2009 with 15K on my car loan and now I have 7.5K in emergency funds and 10.5K in loan balance. Many a times I thought how fool I am to keep 7.5K in my bank while under a burden of 10.5K in loans but thats the whole point of EF … isn’t it? Whenever I run into this quandary I just think this: “What will happen if I am laid-off tomorrow morning?” And then everything seems to be justufied ….

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EscapeVelocity

No particular spice, just an automatic transfer to an online savings account. I definitely save best when I never see the money.

I also have a CD ladder (used to be in T-bills back when they paid interest) as “unemployment insurance”–started out with a smaller amount and added to it as they matured until I got up to a month’s salary in each one. Those renew automatically. At some point, I may split them and have twelve twelve-month certificates instead of six six-month, which would get me a little higher interest rate at the cost of tying up more money.

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Baker

@Alexandra – This has been a hot issue, especially in the past year or so. While you will be sacrificing a small amount of interest, most people receive MORE value from the actual emergency fund than just the dollars would show.

Also, more and more these days, credit cards are canceling unused accounts, changing terms of service, and adding fees with limited notice. While the Credit Card Act will start to help in 2010, many want to KNOW that there emergency fund is accessible in cash. There’s a lot more flexibility in this case.

More importantly, though, I think it is essential for people to break free of the borrow, pay off, borrow, pay off cycle. So in a true emergency it feels good to dip into the fund and pay it off, without having to bust your budget or rack up even more credit card debt. When Courtney and I were purging our debt is was psychologically powerful NOT to have to charge more to our card when something came up.

We chose to build a small fund first ($1000) and then passionately attacked our debt as you pointed out. This worked well for us. I start to feel your point more when people with high interest debt, begin to save 3, 6, or even 12 months of expenses. It’s hard for me to imagine doing that with high debt amounts.

Thanks for the discussion!

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April

Great post, Baker.

RE: Narrow your definition of an “emergency.”
Our EF is hands-off for all but the most crucial unexpected expenses. We haven’t had an occasion to tap it yet, but it’s wonderful knowing that it’s there.

RE: Over-budget for miscellaneous expenses
After we set up our EF, we created another savings account for auto repairs. I imagine we’ll set up others as we find more miscellaneous expenses. We think auto repairs aren’t truly unexpected because it’s inevitable that something will need repair or replacement at some point.

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chamoiswillow

Great post. I love the part about making an inventory of your stuff. Not only can this help you purge stuff, and possibly make money by selling it, it is also critical to have in the event of a homeowner’s insurance claim.

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Alexandra

I know the conventional advice is to start your road to financial freedom with an emergency fund. But if you have credit card debt, I don’t see how this makes sense. If you are committed to start being responsible financially, shouldn’t you address the debt first, then start your emergency fund? Every month your extra money goes to knocking down debt at high interest rates. Your debt load goes down each month, making your payments less, and decreasing the amount of time you will be in debt. If you are allocating some of this money towards an emergency fund that needs to be readily accessed, then you will be making terrible interest on that money while paying high interest on your debt. It just doesn’t make sense to me. I would rather pay down my debt aggressively, and use my credit as my emergency fund until such time that I can build my own emergency fund once my debt is gone. If I have to increase my debt load one month because of an emergency, that will very likely be offset by the increased payments I had been making to the credit card beforehand. And I will continue to make those aggressive payments, so paying that emergency loan will be first priority.

Math is not my strong suit, but don’t the numbers make more sense this way?

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